RICS draft guidance note - Valuation of Intellectual Property Rights, Guidance Note, 2nd ed

RICS draft guidance note - Valuation of IP Rights, 2nd edition

Defining the subject IP and assessing legal characteristics

Paragraph 20.2 of IVS 210 states:

'Specific intangible assets are defined and described by characteristics such as their ownership, function, market position and image. These characteristics differentiate intangible assets from one another.'

The subject of a valuation can be a single right, or a portfolio of complementary IP rights and other intangible items. IP rights that are frequently the subject of transactions and valuation reports are those associated with brands, technology, artistic works and data. The term 'technology' is often used to describe a group of complementary assets that can include patents, confidential information, registered designs and copyright.

In order to illustrate frequent commercial applications, and due to similarities in the economic attributes of each grouping, this guidance note separately considers:

  • brand-related IP (brand-IP)
  • technology-related IP (tech-IP)
  • artistic-related IP (artistic-IP) and
  • data-related IP (data-IP).

These are collectively referred to as IP assets.

The commentary in this guidance note covers different types of IP within each category (for instance, trademarks, copyright and design rights are discussed within brand-IP).

Commercial substance is considered when grouping IP within these categories. For instance, if a brand logo is protected by copyright, this guidance note will categorise it as brand-IP, rather than artistic-IP, to mirror its commercial use.

Definition of the subject IP

IP assets can comprise several distinct legal rights and the ownership of these rights can vary between jurisdiction and class of product and service. The valuer should therefore identify, define and describe the specific rights that are the subject of a valuation report. Valuers must also consider the purpose of the valuation (see VPS 1 section 3.2 (f) from Red Book Global Edition and IVS 103 10.2); for instance, a valuation supporting an IP transaction will be influenced by the pooling of IP rights in the transaction.

When considering whether an IP right should be valued as a stand-alone asset or together with a group of complementary assets, the valuer should consider the following factors:

the ownership of the rights

normal commercial practice in the relevant industry regarding the pooling of IP rights for licensing or sale

the separability of individual rights and

the alignment of useful economic life and other economic characteristics of the IP.

A valuer should clearly

identify the legal rights that underpin the subject asset

assess the breadth and strength of these rights and

indicate whether ownership of the rights has been established.

Brand-IP

As there is not a generally accepted legal or financial definition of the term 'brand', a valuer should define the pool of rights that are the subject of a brand valuation. The valuer should consider the following to comprise IP:

registered trademarks

common law rights in trademarks (depending on the law within the relevant jurisdiction)

copyright in artistic works subsisting in the brand design/logo and

design rights/registered designs.

In certain licences and transactions, a broader pool of rights might be included in the definition of 'brand':

copyright in brand guidelines and marketing collateral

recipes, formulations and other product-related confidential information and

URLs and social media sites.

When defining the subject asset and reviewing comparable transactions, the valuer should consider whether it is appropriate to treat such items as complementary to the subject trademarks, copyright and design rights, or whether they should be separately valued.

Each form of legal protection can vary by jurisdiction, so a brand can consist of multiple rights that differ by jurisdiction and by class of product or service. The valuer should consider the appropriate level of segmentation for the valuation as different legal rights might result in different valuation assumptions by country or product category.

There are different methods of determining the ownership of each type of IP; some rights are automatic, while others require examination and registration by the appropriate body.

A further complication is that ownership of each right can be vested in different parties. For instance, where a trademark includes an artistic work, this might be protected by copyright, which is a separate and distinct right from the trademark. Also, the two assets may be owned by different parties. This is of particular relevance, as the creator of an artistic work is the initial owner of the copyright (rather than the party that paid for the work).

The legal remedies available for breach of copyright or trademark protection vary, and where both rights subsist in a brand, either or both can be used for enforcement.

Within each jurisdiction, trademark registrations are by class and in respect of specific goods and/or services. Registration in one class does not necessarily provide the right to use the mark in another class. Common law trademark rights vary by jurisdiction (some countries have a 'first-to-file' regime) and are typically only fully tested in a passing off action.

Tech-IP

Tech-IP includes:

patents

designs

plant breeders' rights

circuit layout rights

copyright

technical know-how and

trade secrets pertaining to formulations and other technical information.

In some instances, it is appropriate to value specific rights on a stand-alone basis, while in others it is appropriate to identify a pool of complementary assets. In instances where the term 'technology' is used to describe a subject asset, the valuation should clearly identify the specific rights included in the definition.

The valuer should be aware that the value of a specific right can vary depending on whether it has access to other assets required to commercialise it.

Patents

For a set period, patents provide patentee(s) with the exclusive right to exploit an invention. In return for this right, the invention that is the subject of patent protection is published about 18 months after the first filing date. Patents are governed by specific country legislation and also by international treaties, so the extent to which a technology benefits from patent protection can vary by jurisdiction.

The term of patent protection is typically 20 years, but there are some exceptions to this rule. For example, some jurisdictions have a two-tier patent system that includes innovation or utility patents, which have less onerous patentability requirements and shorter periods of protection. An extension to the patent term may also be granted under certain circumstances.

The claims within a patent specification define the scope of the exclusive right conferred by the patent (or the protection sought by a patent application). The breadth, validity and enforceability of the claims are therefore central to the value of a patent.

Patents are generally subject to a lengthy and complex examination period prior to grant. The earnings and risk profile of a patent application differ from those of a granted patent. This is because a patent application might not proceed to grant or, if it does, the claims of the granted patent may be of narrower scope than the initial patent application. It is therefore necessary to differentiate between a patent application and a granted patent.

For patent applications, the communication between the regulatory authority and applicant, referred to as the prosecution history, can provide insight into obstacles to particular claims. Patents expire if maintenance fees are not paid, so the grant of a patent does not imply that it remains in force until the end of the patent term.

Even once granted, the validity and scope of a patent can be challenged, thus an enforcement risk remains after grant. A granted patent can subsequently be found to be invalid due to a range of factors, including:

the existence of prior art that was not identified during the prosecution process and

flaws in the construction of the patent claims, resulting in a definition of the invention that is less than full, clear, concise and exact.

The commercial strength of a patent can be compromised if it is difficult to prove that another party is infringing it. This reduces the ability of the patent owner(s) to enforce their exclusive right to the invention. The ease of proving infringement differs depending on the subject matter of a patent.

The right to the grant of a patent resides with the inventor(s) or owner(s) of the underlying technical innovation. Ownership can be assigned from the inventor(s) to the applicant or patentee in terms of a contract of employment or subsequent agreement. The rights of the party claiming patent ownership can be compromised without proper transfer of ownership from the inventor(s). Inventorship and ownership can be complicated legal issues that can have significant valuation consequences.

A patent excludes other parties from practising the invention but does not guarantee that the owner(s) have the freedom to exploit the patent without infringing patents owned by other parties. A freedom to operate search can be carried out to provide a legal opinion as to whether the subject of a patent can be used without infringing other rights.

A patent that relates to an industry standard may be the subject of licensing obligations required by the standards organisation. These obligations can limit the enforceability of the patent.

Trade secrets

The term 'trade secret' generally refers to information that:

confers an economic benefit

is not in the public domain and

is subject to reasonable efforts to maintain its confidentiality.

Confidentiality can be protected:

through physical, legal and electronic security measures

by limiting access to the information within the organisation

by contractual obligations and

by enforcement of non-disclosure and non-compete agreements.

Risk of inadvertent disclosure and value impairment is influenced by the strength and enforcement of security measures. Clear identification and marking of trade secrets reduces the risk of unintended disclosure.

A trade secret has no protection against independent creation of the same know-how by a third party. The period of legal protection is not limited unless protection is reliant on contractual terms.

A trade secret that is subsequently integrated into a patent application, or registered copyright, enters the public domain and loses the right of protection as a trade secret.

Copyright

Copyright can protect certain documented subject matter, including know-how, designs, integrated circuit designs and computer software code (which may be protected by both patents and copyright).

Copyright protects the expression of the work and not the idea or process underlying the work. In the case of software, the source code represents the expression of the work. Other legal characteristics of copyright are identified in section 2.4.

Industrial designs protect the visual design of objects that are not purely utilitarian. These can be registered in individual jurisdictions or through international treaties that provide a single application mechanism for registering an industrial design in several countries. The period of protection depends on the relevant jurisdiction. Some jurisdictions also provide protection for unregistered designs.

Artistic-IP

Paragraph 20.3 (c) of IVS 210 states:

'Artistic-related intangible assets arise from the right to benefits from artistic works such as plays, books, films and music, and from non-contractual copyright protection.'

Copyright is the primary IP protecting this category of intangible asset. As copyright is vested in the human creator of the work, the author of the work and the copyright holder should be established if there has been an assignment of ownership. Ownership rights can be influenced by employment contracts or other contracts entered into by the author. Computer-generated works can pose problems in establishing the authorship necessary for copyright protection.

Registration is not necessary to establish copyright protection, but copyright can be registered in some jurisdictions, and this can support copyright litigation. In some instances, the copyright owner's protection can be enhanced through notification that the subject item is subject to copyright.

If title to the copyright has passed through a number of hands, a clear chain of title to the work and the rights attached thereto should be established.

In describing the subject asset, the valuer should identify the type of work (e.g. architectural, literary, dramatic, musical, artistic, cinematographic or sound recording) and potential sources of earnings, such as broadcast, distribution, display and reproduction.

Copyright provides a range of rights to an original work, and its total earnings potential can be split between the owners of different rights. It should therefore be determined whether the subject asset is the unencumbered ownership of the copyright, or a right to use the original work for a limited purpose.

The period of protection depends on the relevant jurisdiction and subject matter.

Depending on the jurisdiction, dual protection under copyright and design registration may be permitted or prohibited.

Data-IP

Data assets can consist of:

raw data

organised compilations of data

database schemas, which describe the structure and workings of a database and

algorithms, or other insights that have been extracted from the data.

In describing the subject asset, the component parts should be identified and described. Depending on the purpose of the valuation, the subject asset can consist of a pool of complementary data assets, or in specific items, such as an algorithm.

Whether or not copyright subsists in data depends on whether it represents a literary work. Practice will vary by jurisdiction, but factors that are usually relevant include whether it is:

  • original
  • in a material form and
  • a 'literary', 'dramatic', 'musical' or 'artistic' work created by a human.

Copyright can subsist in multiple individual works within a database, and in a compilation of works.

Data can be protected as a trade secret to the extent that confidentiality can be maintained. The characteristics of trade secrets are described in section 2.3.2. In addition to copyright and trade secrets, some jurisdictions have specific database protection laws.

Consideration should be given to the extent that personal data protection laws, such as the EU General Data Protection Regulation (GDPR), dilute the protection of data-IP.

Where data is used in conjunction with software, but is valued as an identifiable asset, care should be taken to ensure that there is no overlap between the two intangible assets, such as in circumstances where algorithms extracted from a dataset may be embedded in software that is distinct from the data asset.

To the extent that copyright subsists in components of a database, ownership vests in the human creator of the work, as described in section 2.4. Ownership of personal data, and restrictions to its use, can be subject to jurisdiction-specific laws.